China Investment Corp.'s $1.7-billion purchase of a 17-per-cent stake in Teck Resources Ltd. is part of a strategic move into commodity plays. But it's also a reflection of the fund's newfound expertise in all things Canadian, through freshly minted executive Felix Chee.
Call him our man in China.
In his latest incarnation, Mr. Chee is special adviser to the head of investments at CIC, a post he took up late last year. The $200-billion (U.S.) fund itself has been around only since September, 2007.
Before he moved to Beijing, Mr. Chee was a familiar face in domestic investment circles. He's the former chief investment officer at Manulife Financial, and was head of the Ontario Hydro pension plan and the University of Toronto Asset Management Corp.
That Manulife role is critical to what played out Friday, when CIC bought the biggest private placement ever seen in Canadian capital markets.
Mr. Chee, 62, helped put this deal in motion four months ago, with a call to Scotia Capital vice-chairman John Sherrington. He was reaching out to an investment banker who oversaw the $2.5-billion Manulife initial public offering, the largest IPO done by a domestic company, when Mr. Chee was at the insurer.
Mr. Sherrington is now global head of private equity at Scotia Capital. That first call opened the door to talks with Teck that gave CIC its first meaningful Canadian exposure, and direct ownership in a commodity play. Sources close to the deal say Mr. Chee and CIC were attracted to an opportunity to purchase a copper and coal miner at low valuations.
Teck has a small stake in the Fort Hills oil sands project, which the company may sell, and sources said CIC attached no significance to that project.
"As the first major investment by CIC in a Canadian company, this is a landmark transaction in the Canadian capital market," Mr. Sherrington said.
In money management circles, Mr. Chee is known as an innovative thinker, who embraced the concept of seeking lower risks and higher returns in alternative asset classes such as private equity long before such a strategy was trendy.
He declined to comment yesterday on his role in the Teck deal.
At CIC, Mr. Chee's responsibilities include hedge fund holdings and other alternative asset investments.
Scotia Capital and just about every other investment bank on the planet have been pitching debt-heavy Teck with refinancing plans ever since the company took on $9.8-billion of debt last year to buy Fording Coal.
Many of these recapitalizations, including concepts proposed by domestic pension funds, involved a loss of control for the major shareholders, including chairman Norm Keevil, who hold the majority of votes at Teck through a dual-share structure.
Alternatively, Teck faced the unattractive prospect of selling a stake in its coal mining operations in southeastern B.C. or copper mines in South America in the depths of a recession.
When negotiations with CIC began this winter, Teck's stock price was in the dumps, touching $3.35 in March on fears the company would default on debts. The Chinese fund initially looked at purchasing convertible debentures or stock plus warrants in the company, financings that would have diluted the ownership of Teck's existing shareholders.
But as transpacific talks progressed, Teck got back on its feet by selling $4-billion of bonds and a number of small properties, rebuilding its balance sheet and sending its share price soaring. CIC eventually decided that the best way to invest was a purchase of 101 million Teck subordinated voting shares at $17.21 each, which turned out to be less dilutive that other options. The Chinese fund will hold 17 per cent of Teck's equity, but just 6.7 per cent of the votes, and CIC has agreed to sit tight with this investment for at least a year.
Teck, obviously, is thrilled with the way this deal worked out.
"This transaction will have an immediate and very positive effect on Teck's balance sheet," said Don Lindsay, president and CEO of the mining company. He said the CIC investment "represents an attractive opportunity for Teck to establish a relationship with a major Chinese financial investor, with a deep understanding of China, the world's largest consumer of our principal products."